Many of us have heard of APR. It stands for mean Annual Percentage Rate and is a way of calculating the interest charges for loans. From bank loans to hire purchases, and credit cards to mortgages, the interest payable is nearly always measured as an Annual Percentage Rate. This APR is simply a way for the lender to tell you how much of the loan you would pay back in interest over the year, along with the loan repayments. The APR is a great way to work out the cost of the loan, although sometimes other factors such as inflation and loan arrangement fees can affect the overall cost.
How to work out your APR
To work out the cost of a loan, simply take the total loan amount, and divide it by the APR. That will give you total amount of interest you would be liable for over the course of a year. Many of us who take out a loan might not always be paying it back in one year. It could be a small loan that you can repay within months or it could be a bigger loan, such as a mortgage, that could be paid back over many years.
It's straightforward to calculate the cost of a loan when applying an APR to a longer or shorter time period. You just work out the APR as before, then divide or multiply by the corresponding length of the loan. By doing these simple calculations when taking out a loan, many people find it a lot easier to make a more informed decision and can be better prepared with integrating the loan into their household budget.
The APR is essentially the true cost of a loan. When you take out, for example, a straightforward bank loan, the bank will usually give you a set time to repay the loan and the amount you must repay each month. The total amount repayable will be larger than the amount borrowed to take into account the interest you're paying back at the same time. So while the APR gives an accurate measurement, the true cost of the loan is calculated by multiplying or dividing the APR according to the length of time you'll be making repayments. So while a one-year loan would simply cost the equivalent of whatever the APR is on the loan, the true cost of a loan to be repaid over a longer period of time will be higher.
Although most people understand how to work out their APR, there can be areas of confusion with interest rates. Sometimes borrowers are unsure whether the APR relates to the amount of the loan or the amount left to pay if some of the loan is paid off. Unless stated otherwise, the APR is always the rate of interest applied to the total of the original amount borrowed. For example, if you borrowed £1000 to be paid back over two years at an APR of 5%, and you had paid back £900 so far, you would still be paying as part of your repayments 5% APR on £1000, the total amount.
Watch out for adverts of APRs advertising low amounts. These could be monthly APRs that you would need to multiply by 12 to get the proper APR. Lenders have a legal obligation to provide the APR, so as to ensure customers are able to measure the true cost of a loan. Some APRs can be variable, and this is sometimes the case with mortgages. As a result they can fluctuate and make it harder to work out the true cost of a loan before taking one out. Other loans such as bank loans and credit cards are usually fixed rate. This means the given APR will not change throughout the period of the loan.
This review, published by Mark Bartley, is one of many about borrowing and loans. The information should help people looking to borrow money via a loan.
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